Pension Maximization
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That long-awaited day will soon be a reality. Yes, your retirement ship is almost ready to set sail. Before you climb aboard, however, there are a few crucial decisions to make regarding your pension, especially if you are married. To assist you in this process, we will consider your general options, propose a common win-win alternative and then temper that alternative solution with some due diligence.
Defined Benefit Plans: Your General Options
If you have a defined benefit plan (i.e., a retirement plan through your employer that will pay a monthly income to you), then you will be asked how you want the payouts calculated. For example, do you want payouts to be calculated to last as long as you live (single life option) or until the later of your death or the death of your spouse (joint and survivor option)? This decision must be weighed very carefully.
If you choose a single life option, then the monthly payout will be higher … but it will end upon your death. This could leave your surviving spouse without needed income. On the other hand, if you choose the joint and survivor option, then the monthly payout will be reduced to cover the actuarial risk of the payouts extending over an additional life. Nevertheless, with the joint and survivor option, if your spouse predeceases you, then you are stuck with the lower payout for the rest of your life.
A Win-Win Alternative for Your Retirement Payout
Would you prefer to have the higher payout afforded by the single life option, while providing for the continuation of at least that payout amount for your spouse should you predecease? If so, then you will need to determine the present value of a lump sum invested at a safe interest rate to generate that payout amount. Question: Once this lump sum is determined, how is it most efficiently created?
Answer: life insurance. In fact, life insurance is the only financial tool that provides a pre-determined lump sum of cash at just the moment it is needed. Remember, however, that while the policy death benefit is income tax-free when paid in a lump sum, it is part of your estate value for estate tax purposes. Nevertheless, even the estate taxation of life insurance death benefits can be avoided by careful legal planning.
Due Diligence
Unfortunately, more life insurance is sold than is bought. Accordingly, when considering the purchase of this important financial asset, make sure the insurance company is financially stable, that the insurance premiums will be affordable (regardless of changes in interest rates) and that you are healthy enough to be insurable. Never, ever make any irrevocable decision regarding your retirement finances without properly weighing the pros and cons!
Conclusion
Retirement should be a time to enjoy the fruits of your labors. Careful planning now can help ensure greater financial security over the long haul.
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